Observations by an academic researcher on the use of “open”-ness as a competitive strategy, with a particular interest in coping with the commoditization of information goods and technologies in an Internet-enabled world.

Sunday, October 21, 2007

In a decision Thursday that made headlines here in Canada but was largely ignored elsewhere in North America, a government body decided to retroactively impose a mandatory 3.1% royalty on legal music downloads to compensate songwriters and composers.

In the only decent story on the subject, the Global and Mail notes that the new 3.1% royalty adds onto the 7.9% fee being made to music publishers. On a 99¢ (CDN) download, the label gets 60¢, these royalties run 11¢, the bandwidth is about 1¢ and the credit card companies (for small transactions) get 10-20¢. While the iTunes Store has set a 99¢/song ceiling on prices, one executive predicted these royalties could push pricing past one loonie (CDN 1.00). Canada also has a tax (or mandatory royalty) on blank CDs and music players to collect royalties for artists.

In some ways, that's double jeopardy because [if it's at all like the US] the songwriters were already getting compensated by the record labels out of that 60¢; however, I suspect (as on the US) the royalties were based on a physical good rather than an information good. When I did my “digital music" case 5 years ago, I estimated that 28% of the wholesale price of a CD was for manufacturing and distribution, which record labels used as an excuse to limit songwriter royalties. With digital downloads, everything but the royalties is gross profit: if the download volumes ever match physical ones (they won't), record company profits should be higher than they are today.

Despite this potential inequity, I think it's a bad idea to set royalty rates via government fiat. Exhibit A is the March 2007 decision by the equivalent US panel to increase record label payments by Internet radio stations (beyond those of other countries) to more than 100% of revenues. Over the centuries, the only accurate way of setting prices has been through negotiations between with multiple competing buyers and sellers. Whether or not the artists were getting a fair price beforehand, the actions of the US Copyright Royalty Board and now the Copyright Board of Canada have only reinforced that point.